Sunday, November 16, 2008

Give it a population of 300,000, about the same as Coventry, 70 per cent of them in the cities of Reykjavik and Akureyri. Ensure they are all related and give the majority the ability to trace their ancestry back to the times of settlement, more than a thousand years earlier. Endow these people with industry and ambition. Give them their own language - all but unchanged for a millennium - a literary tradition, three national newspapers, two television channels, free universal healthcare and education and close to zero unemployment. Give this country a consistently high ranking in the world standard-of-living charts and you have the Iceland of the recent past. Not a bad place, all in all.

Now allow this country's banks - virtually unregulated - to borrow more than 10 times their country's gross domestic product from the international wholesale money markets. Watch as a Graf Zeppelin of debt propels its self-styled "Viking Raiders" across the world's financial stage, accumulating companies like gamblers hoarding chips. Then sit on the sidelines as the airship flies home and explodes, showering its blazing wreckage over this once proud, yet tiny, nation.

There you see the Iceland of today - the victim of an economic 9/11 and one of the very few places in the world where the words "financial meltdown" can be used without fear of exaggeration.

There is no daytime TV in Iceland. Parents are at work and children at school, so the test card, that feature of a bygone age, is the only thing aired. For the transmitters to be switched on in mid-afternoon and a sombre-looking Geir Haarde, the prime minister, to appear behind a desk, a national flag at his side, it had to be serious - and it was. The country was on the verge of bankruptcy; the government was taking control of the banks and was going to assume far-reaching powers to secure the safety of the nation and its savers.

As I watched, I felt a detached sympathy for those poor people living on a blighted island - until it dawned on me that I was one of them. Recent events had savaged my net worth by 60 per cent and pushed up my cost of living by more than 20 per cent. Iceland's plight was mine, too. What I failed to appreciate at the time was the emotion of this unprecedented television address, particularly in the way it finished:

"Fellow countrymen... If there was ever a time when the Icelandic nation needed to stand together and show fortitude in the face of adversity, then this is the moment. I urge you all to guard that which is most important in the life of every one of us, to protect those values which will survive the storm now beginning. I urge families to talk together and not to allow anxiety to get the upper hand, even though the outlook is grim for many. We need to explain to our children that the world is not on the edge of a precipice, and we all need to find an inner courage to look to the future... Thus with Icelandic optimism, fortitude and solidarity as weapons, we will ride out the storm.

God bless Iceland."

Edda, my partner, was in tears on the sofa beside me.

A drive across town later that afternoon, October 6, at first gave grounds for comfort. The roads were as full as usual for the Reykjavik rush-hour - a half-hour build-up of traffic. Aircraft flew in and out of the downtown airport, students made their way home from schools and universities - note the plural - while visitors went to hospitals and fitness fiends to sports clubs. Reykjavik showed all the outward appearances of carrying on.

But a different picture began to emerge from the hourly news bulletins on the car radio. The Icelandic krona's freeze in the capital markets had now spilled over into the day-to-day transactions of Icelanders abroad. Holidaymakers and business travellers venturing "til Útlanda", as it is called, found their credit cards refused, and those wishing to buy foreign currency could not find willing sellers, aside from one or two who limited their purchases to €200.

Trust in the banks had evaporated and people were trying to find a safe haven for their cash. One man had waited for six hours in a bank while his life savings, more than £1m in kronur (at IKr200 to the pound), were counted out in cash in front of him. "I feel like an innocent man dragged from his bed, put in a barrel and hurled over Gullfoss!" wrote one journalist that morning. "We have been brought down by a handful of men who bet our nation's wealth, fame and prosperity on a throw of the dice." Gullfoss is one of Iceland's tourist attractions - a majestic 100ft waterfall.

On collecting our daughter from her handball practice, I learnt the news that her club could not obtain the foreign currency it needed to release their new team shirts from customs. The city's myriad sports teams rely on local sponsors and our daughter also brought the news that this source of funding for her team was likely to dry up in the months to come. Later that evening, Skype, our communications lifeline, would not renew our credits with an Icelandic credit card. E-mails began to arrive from friends overseas, alarmed by news reports and asking if we were all right.

But all this was trivial compared with the financial distress, in some cases ruin, that now faces a significant proportion of the population.

Easy access to 100 per cent mortgages has seen a change to the traditional pattern of young Icelanders living with their parents until their mid-twenties. The suburbs of Reykjavik have grown by a third in the past decade, most of it housing for first-time buyers. Whole new neighbourhoods have emerged. New streets house young couples, many with children, most with two cars in the drive and furnished with the best that Ikea can provide. All bought with 100 per cent loans, many in foreign currencies.

Iceland is the only country in the world that indexes its loans in addition to charging interest. This means that when Icelanders borrow IKr1,000 from the bank and inflation increases by 5 per cent, the bank increases their debt to IKr1,050 at the end of the year. A great deal for the bank and fine for you, too - so long as the property's value and your salary are increasing by inflation and more. The majority of Icelandic mortgages are based on this punitive system and with inflation running at nearly 20 per cent, they will see their IKr1,000 loan turn into a IKr1,200 loan. The interest burden will increase proportionally. This is bad enough, but when coupled with falling house prices, it means that many face a particularly savage variety of negative equity. The impact on highly geared borrowers, which in practice means most Icelanders, would be hard enough even with two incomes, but with unemployment set to soar, many households are going to go under.

A recent first-time buyer, a woman in her late twenties, said: "I took a 100 per cent loan to buy an apartment. I placed my savings in Kaupthing's money market account, because it promised high interest rates, and my pensions in Kaupthing's Vista 1 at the prospect of becoming a millionaire retiree. Both of these funds were based on stock investments and I knew that they were risky - but I took the bait and the risk. Now most of this money, if not all, is lost."

Icelanders are by nature frugal people. It was one of the few countries in the world, perhaps the only one, that had a pension system that could meet the needs of its ageing population. But in recent years, many older people have been persuaded by the banks to invest their savings in high-yielding money-market accounts. As a result of the collapse of the banking system, many of these accounts have seen huge write-downs and some are now worth less than half of their previous values. The additional money people had put aside to top up their pensions has been hard hit.

Bjork, Iceland's ambassadress of cool, summed it up in The Times on October 28: "Young families are threatened with losing their houses and elderly people their pensions. This is catastrophic. There is also a lot of anger. The six biggest venture capitalists in Iceland are being booed in public places and on TV and radio shows; furious voices insist that they sell all their belongings and give the proceeds to the nation. Gigantic loans, it has been revealed, were taken out abroad by a few individuals and without the full knowledge of the Icelandic people. Now the nation seems to be responsible for having to pay them back."

A homemade banner, made of sheets, hangs over the main motorway in Reykjavik, tied to the railings of a bridge. "Stondum Saman!" it cries out. "Let us stand together!" It's the new rallying cry of a beleaguered nation.

Icelanders have seen their economy swell and shrink from time to time over the centuries, and always handled it calmly. Perhaps their heritage in fishing and agriculture enabled them to meet good years and bad with equanimity. Now they must cope equally well with an attack of economic bulimia. To understand what makes this crisis - kreppa, as it is known here - so unlike any other, a little history is needed.

For Icelanders, the golden years were the early years, shortly after the land was settled in the ninth century. The Viking tradition, the Althing - the legislative assembly dating to 930 - and the literary canon of Sagas and Eddas are the nation's cultural bedrock. But after that, Iceland almost disappears from the history books. While the agricultural revolution, the Renaissance, the industrial revolution came and went, while the fine cities of Europe were being built, while artists from Michelangelo to Mozart were pouring forth their creations, while the great inventions and discoveries were being invented and discovered, Icelanders were hunkering down in their turf houses, meeting the hardest challenge of all - survival.

They survived plague, famine, earthquakes and volcanoes. There were times when some even considered abandoning the island. But they stayed on. They stayed and survived. Icelanders will tell you that only the fittest survived, but that is only half the story, because survival requires another key attribute: stubbornness. And Icelanders have it in spades. It is a national trait, and they view it not as a weakness but as a virtue. It comes from experiencing hardship and enduring it. It means finding satisfaction in a simple task done well and sticking to it; finding comfort and solace in family and kinship and being bound by those familial bonds and duties. And perhaps most important of all, it means believing in the independence of the individual as part of the fabric of nationhood, and fighting for that independence. Put simply, the country has values.

And this is what sets this catastrophe apart from the earthquakes and plagues of former years. This is a man-made disaster and worse still, one made by a small group of Icelanders who set off to conquer the financial world, only to return defeated and humiliated. The country is on the verge of bankruptcy and, even more important for those of Viking stock, its international reputation is in tatters. It hurts.

Picture a pig trying to balance on a mouse's back and you'll get some idea of the scale of the problem. In a mere seven years since bank deregulation and privatisation, Iceland's financial institutions had managed to rack up $75bn of foreign debt. In his address to the nation, Haarde put the problem in perspective by referring to the $700bn financial rescue package in America: "The huge measures introduced by the US authorities to rescue their banking system represent just under 5 per cent of the US GDP. The total economic debt of the Icelandic banks, however, is many times the GDP of Iceland."

And here is the nub. Iceland's banks borrowed more than $250,000 for every man, woman and child in Iceland, and placed an impossible burden on the modest reserves of the central bank in the event of default. And default they have.

Voices of caution - there were many in Iceland - were drowned out by a media that became fixated on the nation's emergence from drab pupa to gaudy butterfly. Yet, Icelanders' opinions were divided. For some, the success of their Viking Raiders, buying up the British high street, one even acquiring that most treasured bauble of all, a Premier League football club, marked the arrival of a golden era. The transformation of Reykjavik from a quiet, provincial fishing port to a brash financial centre had been as swift as it was complete, and with the musicians Bjork and Sigur Ros and Danish-Icelandic artist Ólafur Eliasson attracting global audiences, cultural prestige went hand in hand with financial success. Icelanders could hold their heads high before the rest of the world.

Hallgrimur Helgason, well-known for his novel 101 Reykjavik, said in a letter to the nation in a Sunday newspaper on October 26: "Deep down inside we idolised these titans, these money pop-stars. Awestruck we watched their adventures and admired them when they supported the arts and charities. We never had clever businessmen, not for a thousand years, not to mention men who had won battles in other countries... "

For others, the growth was too rapid, the change too extreme. Many became uncomfortable with the excesses of the Viking Raiders. The liveried private jets, the Elton John parties, the residences in St Moritz, New York and London and the yachts in St Tropez - all flaunted in Sed og Heyrt, Iceland's equivalent of Hello! magazine - were not, and this is important, they were not Icelandic. There was a strong undertow of public opinion that felt that all this ostentatious celebration of lavish lifestyles and excess was causing the nation to disconnect from its thousand-year heritage. In his letter to the nation, Hallgrimur continued: "This was all about the building of personal image rather than the building of anything tangible for the good of our nation and its people. Icelanders living abroad failed to recognise their own country when they came home."

What international sympathy there was for Iceland's plight evaporated with the dark realisation that the downfall of Iceland's three main banks - Landsbanki, Kaupthing and Glitnir - brought with it the potential loss of £8bn for half a million savers in northern Europe, the bulk of whom were British. The shrill media response in the UK was reported extensively in Iceland. The British government's use of anti-terror legislation to freeze the assets of Landsbanki pushed Iceland's banking system into the abyss. It was a move viewed in Iceland as hateful and unnecessary. A few days later the one remaining viable bank, Kaupthing, went under.

Then Landsbanki was placed on a British Treasury list of groups subjected to financial sanctions, along with al-Qaeda and the Taliban. A copy of the UK government webpage appeared in Icelandic papers and a new website, www.indefence.is, was launched. A picture on it shows a young girl with a placard that reads: "I am not a terrorist, Mr Brown."

At this time of year, the most-watched TV show in Iceland is Saturday night's Spaugstofan, which translates literally as The Spoof Room. It's a hit-or-miss affair, but events of the past few weeks have provided the writers with a rich seam of source material. A recent episode featured a well-worked lampoon of the film Titanic, entitled Icetanic, with Geir Haarde and the chairman of the governors of the central bank, David Oddsson, standing on the bridge of "the economy that could not sink". A sketch shows Gordon Brown throwing Icelanders off a life raft. "Get back in the water where you belong, you terrorist bastard!" he shouts as he throws another one overboard.

When I tried to explain Iceland's plight to a friend in the UK who works in banking, I received short shrift. "You must have gone troppo, Robert! They may not have dressed up in burkas and strapped several kilos of Semtex around their waists. But to go into the high street, persuade charities, pensioners, local authorities to deposit money and then disappear, having trousered nigh on £8bn is, even by City standards, bad. Financial terrorism, grand larceny, call it what you will, but the government had to act and act quickly to stop funds leaving the country."

Troppo can hardly apply one degree south of the Arctic Circle, but if its northern equivalent is to go polar, then evidently I have.

Fear, outrage, jealousy and guilt have mingled to form a volatile cocktail of emotions as the blame game has started, and Icelanders attempt to come to terms with it all. They are divided between those who blame the Viking Raiders and those who blame successive governments and central banks for allowing them to behave the way they did.

There have been demonstrations, previously almost unheard of in Iceland, in which families have marched on the parliament buildings, stringing up an effigy of Oddsson along the way.

Of the various Viking Raiders, only one, Jon Asgeir, of Baugur fame, has had the guts to turn up and face the music on a TV chat show. But any temporary benevolence towards him evaporated when it emerged that he had arrived back in Iceland with high-street billionaire Sir Philip Green in tow. Together they proposed to buy Baugur's debt, reported at the time as £2bn, thereby acquiring the group's UK retail assets, including House of Fraser and Hamleys at a significant discount that would involve massive debt writeoffs.

One of the most telling images was the departure of Jon Ásgeir's private jet on news that the government had nationalised Glitnir Bank (in which his investment vehicle Stodir was a leading shareholder), wiping out his shareholding and rattling the debt-burdened house of cards that is his Baugur business empire. Painted black and as sleek as a Stealth bomber, the aircraft was photographed taxiing from its hangar by Morgunbladid, a daily newspaper. Like the last helicopter out of Saigon, the departure of Ásgeir's jet symbolised the end of an era, the last act of Iceland's debt-fuelled spending spree.

Bjorgolfur Thor and his father Bjorgolfur Gudmundsson have, to date, disappeared from the radar. Together they own a majority stake in Landsbanki, and Gudmundsson owns West Ham United football club. Their jets have also flown the coop. Downtown, beside the harbour, construction work on a landmark project underwritten by them, the National Concert Hall, is expected to stop any day now. Like Hallgrimskirkja, the striking cathedral that presides over Reykjavik and that took more than 40 years to complete thanks to a lack of finance, the concert hall might need a change in the country's fortunes before it can be completed.

The government has announced that it will carry out a thorough investigation into what happened and determine who is to blame. It will be called "The White Book", and "leave no stone unturned in getting to the truth". It will not be a slender volume.

We live now in a foreign-currency lockdown, and although the government has assured everyone that there are sufficient reserves to buy essentials such as oil, grain and medical supplies for the winter, such assurances only serve to create a further sense of unease in a people who have learnt to take such commodities for granted.

There is some encouraging news. The International Monetary Fund is putting the finishing touches to a $2bn bailout package and this is likely to lead to a further $4bn from a consortium of Nordic central banks. These funds will come with stringent conditions that will impose external financial controls and impinge heavily on Iceland's hard-won sovereign independence. But they should inject some much-needed confidence into the currency and into an embattled people.

There is an Icelandic expression: "We started with two empty hands." Whoever coined it could not have expected that it would still be so pertinent in 2008, as the nation begins the process of rebuilding its economy and that thing it covets most of all, its reputation.

It is going to be a long, hard struggle.

Robert Jackson is a British journalist who has lived in Iceland since 2003.

Monday, November 10, 2008

In spite of the falling price of crude oil, the Saudis are working on an ambitious investment project to expand their surplus oil production capacity to 12.5 million barrels per day in 2009. The plan serves Riyadh’s strategic objective of upholding the kingdom’s geopolitical primacy in the global energy markets.

Analysis

The price of crude oil dipped to $57.62 Nov. 6, its lowest level since early 2007. The drop occurs amid a widespread financial crisis hitting the three main economic hubs of the world: the United States, Europe and Asia. Though to some extent the Organization of the Petroleum Exporting Countries (OPEC) appears to have cut oil production, the cut still has not been enough to buoy the price of oil and bring relief to politically strained and petrodollar-dependent Iran and Venezuela.

The Saudis, however, are still strutting with style. The Saudi government has some $400 billion in foreign assets sitting in its central bank, and with the government budget already set for $45 oil, the Saudis could come out of 2008 with a surplus of around $150 billion. Cushioned with petrodollars, the Saudis have time to plan for the future and ensure their geopolitical primacy in the oil markets.

Saudi Arabia’s massive oil reserves are both a blessing and a curse. With oil wealth, Saudi Arabia is a powerful player in the international arena, arming it with the tools to sink or support other regimes through its leverage in the energy markets. Without oil wealth, Saudi Arabia is a desert backwater.

Though oil wealth allows multibillion-dollar arms purchases, these alone cannot transform the Saudi military into a professional fighting force when the country lacks the training, experience, skill and discipline to fight even a small war. But by creating a codependency with an energy-hungry superpower like the United States, Saudi Arabia can more or less outsource its military requirements. Without oil revenues, the Saudi royal family would be unable to pacify and subsidize a deeply divided population and to combat internal and external threats to its rule. But an oil-rich economy has created a work force in Saudi Arabia that largely lacks the skills, training — and most important, the will — to develop industries independent of oil for long-term growth.

If Saudi Arabia wants to remain the leading Sunni power in the Arab world and a highly influential player in global energy politics, it must have the surplus oil production capacity to ensure its position as the swing player in the energy markets. Without such a production buffer, Riyadh would not be able to bend Washington’s ear on matters like Iran whenever Saudi Arabia sees the need. OPEC’s total surplus crude oil production for 2008 is about 1.55 million barrels per day (bpd), almost all of which is held in Saudi Arabia, at a time when global crude consumption is at around 85 million bpd. With the margin so thin, oil prices became all the more vulnerable to supply disruptions.

Now that the global economic contagion has depressed demand, there is more oil in the market to give oil prices more wiggle room. Saudi Arabia can thrive in this type of market simply by ensuring it has enough spare capacity either to flood or drain the energy market at will.

To this end, Saudi Arabian Oil Co. (Saudi Aramco) is working on an ambitious $129 billion project to raise its oil production capacity to 12.5 million bpd in 2009, construct new petrochemical plants and refineries so it can move up the value chain, and invest in advanced exploration and production technologies to increase Saudi Arabia’s proved recoverable reserves from 260 billion barrels to more than 450 billion barrels within the next two decades.

With plans to up their country’s oil production capacity to 12.5 million bpd, a 32 percent increase, the Saudi royals essentially are building an insurance plan: The more oil Saudi Arabia keeps in reserve, the more leverage it holds in the energy market.

To accomplish this, the Saudis need not trouble themselves with increasing the number of operational oil fields. Those reserves need to be safeguarded for hard times far down the road, when Saudi Arabia actually must worry about having its existing oil production sites run dry. Instead, the Saudis will work to maximize production at existing fields. Those fields include Khurais, which is expected to produce 1.2 million bpd in 2009; Shaybah, where output will rise from 500,000 bpd to 750,000 bpd in 2009; Khursaniyah, which will produce 500,000 bpd in 2009; Manifa, an offshore field that will yield 900,000 bpd in 2011; and Ghawar, the world’s largest oil field, which has been in production since 1951 and has seen a surge in drilling activity in recent years.

The Saudis cannot simply live by a “drill, baby, drill” mantra in extracting oil from these fields. Many of these fields are old and must be treated with care. As Abdullah al-Naim, vice president of petroleum engineering for Saudi Aramco said in a recent Forbes interview, “We go really slow and soft … Ghawar we treat as you would a young woman.” Saudi Aramco uses technology that restricts the penetration of the drill in creating the oil well, thereby reducing the resulting water flow that could end up damaging the field. This is a delicate and expensive process, but a necessary one if Riyadh hopes to maintain its vigor in global energy politics in the longer run.

Saudi Arabia’s investment plans should be of increasing concern to oil producing states like Iran, Venezuela and to a lesser extent Russia, which probably are all on Riyadh’s target list. Historically, the Saudis have a penchant for using their oil wealth as a weapon to drive competitors out of the energy market, thereby cutting the legs out from under geopolitical rivals.

By increasing their production capacity, the Saudis are essentially building up an arsenal to swing the energy market in their favor. For the Saudis, $30 crude is a pinch to the purse, but an eminently survivable one. For the Iranians or the Venezuelans, however, it could mean a matter of life or death for the regime. Regardless of whether Saudi Arabia follows through in massive production cuts or boosts, the mere threat of such action creates hefty geopolitical sway — something that can only be reinforced with a large enough surplus crude production capacity.

Wednesday, November 5, 2008

Next week, the IEA is releasing their new World Energy Outlook. There have been rumors that the IEA was going to break loose of US political pressure and finally be honest about the energy situation. Some of the media seem to have gotten early copies of the report, among them the Financial Times. They published three articles about the report today. I'm posting them in three separate posts. The first is this overview:

In a flagship report due to be published next week by the International Energy Agency, the developed world’s energy watchdog doubles its forecast the price for oil will reach by 2030 and predicts the era of cheap oil is over. Below are the report’s highlights.

The Challenge:“It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply.”

The Oil Price:“While market imbalances could temporarily cause prices to fall back, it is becoming increasingly apparent that the era of cheap oil is over.”

Supply and Investment:“Globally, oil resources might be plentiful, but there can be no guarantee that they will be exploited quickly enough to meet the level of demand projected.”

“Production continues to outstrip discoveries (despite some big recent finds, such as in deepwater offshore Brazil).”

“Observed decline rates vary markedly by region; they are lowest in the Middle East and highest in the North Sea.”

“Investment in 1m b/d of additional capacity – equal to the entire capacity of Algeria today – is needed each year by the end of the projection period just to offset the projected acceleration in the natural decline rate.”

International versus National Oil Companies:“The opportunities for international companies to invest in non-Opec regions will diminish as the resource base contracts, eventually leaving the countries holding the bulk of the world’s remaining oil and gas reserves to take on a larger burden of investment.”

“The increasing dominance of national companies may make it less certain that the investment projected in this Outlook will actually be made.”Emissions and Renewable Energy:“The projected rise in emissions of greenhouse gases in the Reference Scenario puts us on a course of doubling the concentration of those gases in the atmosphere by the end of this century.”

“Modern renewable technologies grow most rapidly, overtaking gas to become the second-largest source of electricity, behind coal, soon after 2010.”

There was also this sidebar:

The Report in Numbers

On Cost

● $26,000bn – total energy investment needed 2007-2030

● $200 – Nominal oil price in 2030

● 5-7% – percentage of income consumers will spend on oil

● $2,000bn – Opec’s oil and gas export income in 2030, three times as much as in 2006

● $310bn – total amount the 20 largest developing countries spent on fuel subsidies in 2007

Oil prices will rebound to more than $100 a barrel as soon as the world economy recovers, and will exceed $200 by 2030, the International Energy Agency will say in its flagship report to be published next week.

“While market imbalances could temporarily cause prices to fall back, it is becoming increasingly apparent that the era of cheap oil is over,” the report states.

The developed world’s energy watchdog has doubled its long-term price expectation from last year’s $108 a barrel for 2030 and assumes oil prices will rebound from today’s $60-$70 a barrel to trade, in real terms adjusted by inflation, at an average of more than $100 a barrel from 2008 to 2015.

The IEA’s World Energy Outlook has come to this conclusion largely because it believes companies will struggle to pump enough new oil to offset the steep production declines of the world’s older fields.

In its WEO report, an executive summary of which has been obtained by the Financial Times, the IEA estimates that by 2010 oil companies will have to commit to projects producing almost as much oil as Saudi Arabia – or about 7m barrels a day – if the world is to avoid a supply crunch by the middle of the next decade.

The IEA refused to comment.

The stark assessment comes as companies cancel projects from Kazakhstan to Canada because the collapse in oil prices makes them uneconomical.

The industry will have to invest $350bn each year until 2030 to counter the steep rates of decline of existing fields and find enough extra oil to satisfy the growing demand of countries such as China, the report states.

Output from the world’s oil fields is declining at a natural rate of 9 per cent, the IEA found, following the most comprehensive review of its kind. This decline rate is curtailed to 6.7 per cent when current investments to boost production are made. However, even with such investments, the decline rate worsens significantly to 8.6 per cent by 2030.

The declining rates are steeper than the industry had previously assumed. They are also slightly steeper than an earlier draft of the report because the IEA has expanded the study to 800 oil fields, adding 250 smaller fields.

The world economy will witness a $2,000bn shift in wealth and power from oil-consuming countries to members of the Organisation of the Petroleum Exporting Countries as oil prices rise to $200 a barrel by 2030.

That stark assessment will be made next week by the International Energy Agency, the western countries’ energy watchdog, which will also warn that oil prices could rise even further because national oil companies in oil-rich countries are likely to delay investment decisions.

The IEA’s flagship World Energy Outlook annual report does not map the impact of the surge in Opec’s revenues.

But the jump is likely to have profound implications for equity, foreign exchange, fixed income and commodities markets as the cartel recycles its petrodollars.

The IEA says that Opec oil reserves are big and cheap enough to increase production and cap oil prices, but it warns: “Investment by these countries is assumed to be constrained by several factors, including conservative depletion policies and geopolitics.

“There remains a real risk that underinvestment [bet­ween now and 2015] will cause an oil supply crunch,” the report states.

The projected near-tripling of Opec’s revenue to $2,000bn by 2030 from last year’s $700bn comes on the back of significantly increased oil price assumptions.

In its report, the IEA sees oil prices reaching $200 by 2030, almost doubling last year’s forecast of $108 by the same year.

The report suggests that current oil prices – below $70 a barrel and less than half their peak summer level – are a temporary effect of the economic crisis.

It says that in the future the world will face “persistently high levels of consumer spending on oil”.

“While market imbalances could temporarily cause prices to fall back, it is becoming increasingly apparent that the era of cheap oil is over,” the IEA says in the executive summary of the report, to be published next week.

In the short term, however, prices are likely to remain highly volatile.

But it adds: “Beyond 2015, we assume that rising marginal costs of supply exert upward pressure on prices through to the end of the projection period [2030].”

The Financial Times obtained a copy of the report’s 13-page long executive summary, which was drafted only a few days ago, and was not under embargo. The IEA refused to comment.

Oil prices hit an all-time high of $147.27 a barrel in July, but since then have fallen back to $60-$70 a barrel as consumption has weakened.

West Texas Intermediate crude oil, the US benchmark, yesterday fell $4.30 to $66.22.

In its report, the IEA assumes a rebound from today’s levels, expecting oil to trade, in real terms adjusted by inflation, at an average of more than $100 a barrel from 2008 to 2015.

By 2030, prices will be more than $200 a barrel, or more than $120 when adjusted for inflation.

“These [price] assumptions point to persistently high levels of consumer spending on oil in both OECD [Organisation for Economic Co-operation and Development] and non-OECD countries,” the IEA report says.

Over the next 22 years, consuming countries will devote 5 per cent to 7 per cent of their gross domestic products to pay for their oil, up from 4 per cent in 2007.

This will have “serious adverse implications for the economies of consuming countries”.

“The only time the world has ever spent so much of its income on oil was in the early 1980s, when it exceeded 6 per cent,” the report says. In 1998, when oil traded just above $10 a barrel, the world spent just 1 per cent of its GDP on oil.

The much higher oil price assumptions, on top of concerns about climate change and the daunting challenge of investing enough in new production, prompt the IEA to warn that the “current global trends in energy supply and consumption are patently unsustainable – environmentally, economically, socially”.

“The surge in prices in recent years culminating in the price spike of 2008, coupled with much greater short-term price volatility, have highlighted just how sensitive prices are to short-term market imbalances,” the report adds.

“They have also alerted people to the ultimately finite nature of oil and natural gas resources.”

The steep rise in oil prices over the next 20 years, on top of rising production, will trigger a large windfall to Opec countries, which are forecast to earn the equivalent of about 2 per cent of the world’s GDP, up from last year’s 1.2 per cent.

The cartel will control 51 per cent of the world’s oil supply by 2030, up from last year’s 44 per cent.

Saudi Arabia will remain the largest producer with its output rising to 15.6m barrels a day in 2030 from the current 9.5m b/d.

The shift will be keenly felt among international oil companies such as ExxonMobil of the US and the UK’s BP.

Their access to oil reserves will become increasingly curtailed because the world’s remaining large reserves are in the hands of countries unwilling to open their doors to them.

Referring to Opec and other non-Opec countries that restrict foreign companies, such as Mexico or Russia, the report warns: “It cannot be taken for granted that these countries will be willing to make this investment themselves or to attract sufficient foreign capital to keep up the necessary pace of investment.”

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An end is urged to fossil fuel subsidies

An end to the enormous subsidies paid to fossil fuel energy generators will be needed to set the world on a path of low-carbon generation, the International Energy Agency will say next week, writes Fiona Harvey.

The IEA will say that subsidies on energy consumption were $310bn for the 20 biggest countries outside the Organisation for Economic Co-operation and Development in 2007.

Converting this subsidy to lower-carbon energy sources could be the biggest source of support to low-carbon energy, including renewable sources, and carbon capture and storage.

The agency believes the energy sector will have to play the central role in turning the world from high- to low-carbon energy sources. But the transition cannot be achieved without “radical action by governments” – for instance by putting a higher price on carbon dioxide emissions and encouraging the growth of wind and solar energy.

The IEA also says that renewable sources are set to overtake gas as the second biggest source of energy “soon after 2010”.

Renewables will be the fastest source of energy growth, the IEA predicts.

But it also warns that on current trends, greenhouse gas emissions will far exceed the levels that climate change scientists say are safe.